Chip Filson, CEO of the firm, made the suggestion during an August 12 Web event that Callahan hosted. He pointed out that while the 1998 Credit Union Membership Access Act restricts most credit unions to using retained earnings as their source of capital, it also allows credit unions with a low-income designation to use secondary accounts that are uninsured and subordinate to other accounts as sources of capital.

Money in subordinate accounts is money that would be repaid last if the credit union were to be dissolved, behind the claims of creditors or the NCUSIF.

Filson and Callahan staff explained that, as of March 31 of this year, only 44 credit unions nationwide with a low-income designation use the secondary accounts as sources of alternative capital and suggested that more credit unions should consider taking this approach.

Under NCUA rules, low-income credit unions are those where either a majority of the CU's members either earn less than 80% of the average for all wage earners as established by the Bureau of Labor Statistics. (This year, average wage is $19.29/hour; 80% is $15.43.) Or members can have an annual household income that is below 80% the median household income for the nation as established by the Census Bureau. (This year, the median is $48.023; 80% is $38,418.)

Filson observed that currently five states, Alabama, Arkansas, Louisiana, Mississippi and West Virginia have median household incomes that fall into that designation and suggested that credit unions in those states face a pretty good chance of qualifying as low-income CUs.

No matter whether you are a community charter or have SEGS, if you are in those states you might already have a membership that would qualify, Filson said.

Further, Filson observed that NCUA expects low-income credit unions that seek secondary capital to have a plan on how to use it, an approach that seems to have worked well so far. The 44 low-income CUs which use alternative capital had return on assets of 1.16% and return on equity of 9.95% as of March 31.

Becoming recognized as a low-income credit union and getting some secondary capital can bring its own headaches. The Webinar included a presentation from Tristam Coffin, CEO of the $54 million Alternatives Federal Credit Union in Ithaca, N.Y., to provide some practical perspectives on secondary capital from a low-income designation.

According to Coffin's presentation, Alternatives has $3.8 million in core capital and $1.8 million in uninsured secondary capital. The 9,000 member credit union defines its mission as primarily helping lower-income people and communities make their way onto the economic and banking ladder. Coffin said that fully 25% of the CU's new members arrive at the CU without any relationship with a financial institution.

Coffin credited the uninsured capital for helping Alternatives keep an overall capital ratio of over 7% (currently 7.03% ). The secondary capital is in the form of uninsured subordinated loans to the credit union for up to seven years from foundations, the National Federation of Community Development Credit Unions, the U.S. Treasury Department's Community Development Financial Institutions Fund and some Alternatives members who banded together to form an organization called the Friends of Alternatives.

One of the secondary capital's downsides is that, as loans, it carries an interest rate of between 4% and 5% and is thus a relatively expensive option.

"We definitely use the secondary capital, but we don't see it as a long-term solution for us," Coffin said. "Really, its more of a bridge, albeit a very long bridge, over capital needs."

Filson suggested that most credit unions would likely use secondary capital in a similar sort of way, as a means of funding some specific new area of expansion or service or outreach. He said Abbot Labs Employee Credit Union, Gurnee, Ill., used a subordinated loan from its sponsor, Abbot Labs, of $6 million to get underway and has since repaid the loan.

Diana Dykstra, CEO of the $489 million San Francisco Fire Credit Union, San Francisco, told the Web event attendees about another approach to the capital question. Dykstra said the program is not fully in place yet, but the CU has plans to begin moving its patronage payments into member capital accounts, which it would use as a secondary source of capital but which would exist in the members' name. The amount in each account would be contingent on how much the member had participated in the credit union in the form of loans and other products and services. The money would be uninsured and the member could not use it until or unless they left the credit union.

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